Canada's Federal Court of Appeal handed down a landmark decision on treaty interpretation in the Prévost Car case on February 26, vetoing the Crown's appeal on the grounds of errors of fact.
"It was actually quite quiet in the court room that day," said Bill Innes, part of the three-strong Fraser Milner Casgrain team that represented the taxpayer in the case. "The judges asked very few questions and the ones that they were asking were quite pointed. I got the impression that they were a little bit annoyed at the Crown's appeal."
The Crown argued that the trial judge had made four errors of fact.
"It is very, very rare for a court of appeal to reverse on an error of finding of fact, the test is extremely high, it has got to be a palpable and overriding error," said Innes. "I think that the court found the Crown's suggestion that the trial judge, who is a very experienced man, had made four errors a little off putting."
In paragraph 17 of the judgment the appeals court judge recites the facts and in just one sentence states that all of these findings were supported by the evidence.
"In the area of treaty interpretation this is a very important decision because it puts back some balance and is a clear message that the legal form does matter," said Stef van Weeghel, a Dutch lawyer and professor at Amsterdam University, who was one of three expert witnesses asked to contribute to the case.
"They [the appeals court] went way out of their way to say that Canada is not an outlier in the field of treaties," said Innes, meaning that Canada should apply their treaties in ways recognisable to international parties.
The case centred on the term beneficial ownership.
Canada Revenue Agency (CRA) decided that Prevost Holding, a Netherlands holding company, was not the beneficial owner of dividends it received from Prévost Car, a Canadian corporation that built and customised vehicles.
"I was asked to look at the facts and explain in my view what the Dutch interpretation and the international interpretation would be," said van Weeghel. "From both angles I arrived at the conclusion that Prévost was the beneficial owner."
In the appeal the Crown argued that there was no Canadian meaning to the term beneficial owner.
"One of the things we introduced was the fifth protocol to the Canada-US treaty," said Innes. "The US treasury department almost always releases technical interpretations of these things and Canada has got in the habit over the last 25 years or so of reaching an agreement with the US that they adopt the technical interpretation of the US treasury department. Canada actually introduced a press release last year adopting the interpretation that the US had put on the fifth protocol and when you go to it, one of the paragraphs says if you are examining the question of beneficial ownership of a receipt that is coming into Canada, you apply Canadian law to determine beneficial ownership and this is quite inconsistent with the Crown telling us that there is no Canadian definition of beneficial ownership."
"The Crown really didn't have a response to that," he continued.
The decision will have two impacts. The first will be direct as there are a number of cases pending on this principle.
"I would be very surprised if the government did not decide to settle those based on this case," said Innes. "Unless, they decide to take this case to the Supreme Court of Canada, which I don't thing they will."
There are two tests for taking a case to the Supreme Court. One is that it is of international and national importance and the other is that there is good reason to doubt that the underlying judgment is wrong.
"Clearly the first test is met, it is a very important international question but there is no reason that I see to debate the correctness of the underlying judgment," said Innes.
The second impact of the court of appeal's decision in this case is that taxpayers may become less risk averse in dealing with issues under treaties that to-date people have been a little timorous in approaching.
"For example, questions involving royalties, there has been a lot of to-ing and fro-ing about how one treats royalties particularly in the context of computer issues and things of that nature," said Innes. "I think people might become a bit braver in how they approach those issues. I think that with permanent establishment issues people might become a little bit bolder in terms of how they structure things also."
An important part of the judgment is found in paragraph 15 where the Judge Robert Decary wrote about wanting to jeopardise the certainty and stability that a tax treaty seeks to achieve.
"It is extremely important that we establish a climate of stability and certainty in our dealings with our international partners and I personally am absolutely thrilled with that because that is what I was arguing in the courts below and in the court of appeal," said Innes. "It is what the international community wanted to hear and is a principle I have not seen stated that strongly elsewhere in international jurisprudence."
Given the certainty of the decision, CRA's decision to challenge the outcome of the lower court's deliberation could be questioned.
"I think [the fact they attempted an appeal] indicates a certain degree of fracture within the revenue agency and in fact we introduced some evidence of emails going back and forth between different sections of the agency that were adopting different positions on this particular case," said Innes.
"It is a very satisfactory judgment from an international viewpoint. It is easy to understand and is one that business people can really get there teeth into and say I know now when I am going into Canada what kind of judicial climate I am going to meet," he continued.
It is possible that this decision will have a broader implication for treaty interpretation.
"I think that the level of certainty may very well extend to other OECD jurisdictions," said Innes. "I think the OECD will examine this case closely in the context of their own commentary and I wouldn't be surprised if they were to adopt certain portions of it, particularly the portion about the effect of commentary enacted after the date the treaty is entered into."
"I think the court of appeal was very balanced in their approach saying that yes there are going to be occasions where the commentary that comes out after the treaty was entered into will be helpful and we should not ignore it in those cases but in cases where it marks a significant departure from the commentary at the time the treaty was entered into then we probably would not wish to adopt that significant modification."
The case was a first in Canada.
"It is the first time that our national court has examined this question of beneficial ownership under the OECD model in a truly international light," said Innes. I think that what the court was trying to say was we can't afford to be sitting off in a corner by ourselves, we have to embrace an interpretation that falls within accepted international norms.
The CRA have 60 days from the date of the judgment to apply for leave to appeal to the Supreme Court.
